The UAE has transitioned into a wide economy that attracts thousands of investors from around the world. They have earned a solid reputation as an important financial hub that embraces world-class technology. In addition, the UAE’s corporate tax is one of the great advantages that attract investors to settle in the UAE.
In this article, we will make sure you understand everything about the corporate tax practices in the United Arab Emirates. The great majority of companies deciding to establish in the UAE enjoy a tax-free experience. Moreover, the UAE has signed double taxation with some countries to ensure you are not taxed twice.
- Importance of the new UAE Corporate Tax scheme
- How broad will be this new UAE Corporate Tax Law?
- What are the exemptions from the income of the CIT?
- Important features of the UAE’s Corporate Tax scheme
- Why a 9% tax rate?
- Will the income of companies conducting business in a Free Zone or the Mainland be subject to CT?
- Does the CIT scheme apply to free zone entities of large organizations?
- Are offshore companies subject to CIT?
- Are individuals subject to CT?
- How can Connect Free Zone assist you with the new UAE Corporate Tax Taw?
1. Importance of the new UAE Corporate Tax scheme
Many companies moving to the UAE have enjoyed a zero-tax policy on their profits. However, this will change in 2023; the Ministry of Finance (MOF) announced on January 31st of 2022 that they will introduce a federal corporate income tax (CIT). Moreover, the UAE’s corporate tax is expected to apply for fiscal years starting on June 1st of 2023.
This new policy is motivated by the UAE’s desire to comply with international tax standards; following similar regulations in neighboring Middle East countries. In other words, this will minimize the compliance burden for UAE companies while shielding start-ups and SMEs.
Most importantly, the UAE, being home to a key business hub in the GCC, will still have one of the lowest corporate taxes rated worldwide. But this will diversify state income away from oil and gas.
The Undersecretary of the Ministry of Finance stated that the competitive and world-class UAE’s corporate tax, as well as our extensive double tax treaties, will place the UAE’s position as a top-leading hub for foreign, local investment, and business innovation.
In addition, the MOF announced the following important features of the proposed CIT (however, it is subject to change once the policy enters into full force):
1.1. What is the proposed date for the CIT?
As aforementioned, the new corporate income tax is expected to take place for fiscal years starting on June 1st of 2023 or after.
2. How broad will be this new UAE corporate tax law?
The proposed change in the tax law of the UAE will apply to all business (for example, industrial, professional, and commercial) activities of the country. However, excepting the extraction of natural resources, which is subject to taxation at an Emirate level.
The UAE’s tax law will also apply to individuals to the extent they have (or are legally holding). For instance, this applies to a business license or a permit to carry out industrial, professional, and/or commercial activities in the country. In addition, this includes income earned by self-employed individuals (freelancers) for activities stated in the freelance permit or license.
The Ministry of Finance has also stated that the new CIT policy will also apply to bank operations in the country. However, branches of foreign financial institutions or banks are already subject to a corporate tax on income at an Emirate level.
Further, it was announced that corporate tax incentives offered to free zone companies will still be taking place. To the extent that the free zone entity complies will all the law requirements and is not conducting business in Mainland UAE. This also may affect companies operating in both free zones and mainland UAE under a dual licensing scheme.
Free zone businesses, however, will need to comply with some regulations under the CIT scheme such as the requirement to register and file a CIT return. The MOF will provide further details on the new UAE’s corporate tax in the future.
2.1. Proposed rates for the new UAE tax law
- There are 3 different rates of the new tax on corporate income proposed to apply:
- Firstly, a 0% rate on taxable profits up to AED 375,000.
- Secondly, a 9% rate on taxable profits is more than AED 375,000.
- The third rate has not been announced yet. But we know that it will apply to large companies generating global revenues above AED 3.15 billion; this is in line with the Profit Shifting (BEPS) and Pillar Two of the OECD Base Erosion scheme.
3. What are the exemptions from the income of the CIT?
The Ministry of Finance announced the following types of income are exempted from the new UAE’s corporate tax:
- Income acquired from the extraction of natural resources such as oil and gas (see above).
- Capital gains and dividends earned by UAE companies from its shareholdings (for example, a foreign company meeting certain conditions specified in the UAE CIT law and ownership interests in the UAE).
- Re-organizations and qualifying intra-group transactions are subject to specific criteria to be specified in the UAE CIT scheme.
- The income of foreign investors from capital gains, interest, royalties, dividends, and other investment returns.
- Individuals and foreign business entities who do not conduct business or trade in the UAE on a regular or ongoing basis.
4. Important features of the UAE’s corporate tax scheme
- Foreign tax credits
Foreign CIT paid on UAE taxable profits are allowed to be credited against payable CIT. However, you must have in mind the UAE has entered into 130 double tax treaties; an area that will facilitate and ease the right operations of the tax system in the context of international trade and ownership relationships both post and pre-introduction of the new law.
This new UAE’s corporate tax scheme will allow companies to use losses incurred (starting from the entry into force of the CIT) in order to reduce taxable income for consequent financial periods.
- Tax groups
UAE group of business entities will be able to choose a type of tax group and be treated as a single entity for taxation purposes; which will be subject to the specific conditions specified in the UAE CIT scheme. In addition, the UAE tax group can file single tax returns for the entire group of companies.
- Transfer pricing
Companies in the UAE will also need to comply with the different documentation requirements and transfer pricing rules based on the OECD transfer pricing establishments.
The UAE government is still writing entire CIT legislation. The regime that will come into force may change from the MOF’s announcement, companies operating in the UAE (especially dual businesses operating in free zones and the Mainland under a dual licensing) must consider the potential impact of the announced regulation and prepare for the upcoming law changes.
For instance, you can reach out to us anytime you want if you have any inquiries or want further assistance in the potential impact of the UAE’s corporate tax scheme on your operations and company in the UAE.
Our legal team will provide you with the support you need with potential restructurings, validation considerations, etc.
5. Why a 9% tax rate?
As part of the recent tax international developments, the UAE has introduced important corporate tax regulations as part of the aim to be an important business hub for business and investment. Further, the 9% CT rate, while being a shift on the zero-tax policy, is still one of the lowest corporate taxes globally.
This rate was most likely selected to maintain the UAE as an attractive investment destination. In addition, this 9% UAE’s corporate tax will likely ensure that some income and profit streams remain taxable in the country without loss of tax revenues.
Further, the subject total rule (SSTR) provides an increased stream for taxation on certain base-eroding payments (for instance, royalties and payments); this happens when the taxation does not happen at the minimum 9% rate.
Most importantly, establishing the CT rate at 9% will make the UAE government ensure that royalties and interests earned by UAE organizations are not subject to increased source taxation outside the country.
6. Will the income of companies conducting business in a Free Zone or the Mainland be subject to CT?
It is still unclear if free zone companies are taxed on their profits from conducting business in mainland UAE. Or if all their income (including income sourced outside the UAE or in free zones) will be subject to the UAE’s corporate tax.
In addition, the UAE will abide by tax incentives provided for free zone companies; it is likely that free zone companies will need to pay taxes only from their mainland income. Further, it is expected that the CIT will only work on deductions for expenses that happened connected to this income.
Therefore, if that is the case, businesses could expect to allocate all their expenses accordingly.
7. Does the CIT scheme apply to Free Zone entities of large organizations?
Some qualifying free zone business entities are not subject to the UAE’s corporate tax law. However, free zone organizations that are part of multinational groups may need to comply with the 15% Global Minimum Tax (GMT).
For instance, multinational organizations whose ETR in the country is less than 15% may have a limited tax payable outside the country. However, it is still unclear if the new corporate tax regulation will have mechanisms to ensure it is payable in the UAE instead of other jurisdictions.
Given the potential loss of revenues for the UAE; it is likely that this mechanism will come into reality. There are some options the UAE government can use to ensure top-up taxes do not go wasted outside the country:
- The CT rate for entities of large business groups is established at 15% or higher.
- A qualified local minimum tax (for instance, a domestic version of the income inclusion) can come into force and apply as a parallel tax system. That is to say, any top-up tax amount calculations for a particular fiscal year are paid in the country.
Similarly, it is likely that free zone entities of large corporations qualifying for the UAE’s corporate tax will become subject to CT; either in the UAE or another jurisdiction.
8. Are offshore companies subject to CIT?
The UAE has offshore entities schemes where offshore businesses can establish in Jebel Ali Free Zone (JAFZ) and Ras Al Khaimah Economic Zone (RAKEZ).
But while the Ministry of Finance corporate tax FAQ does not address if these offshore organizations are subject to CT; we can expect them to stay in line with general free zone entities. Offshore businesses tend to prepare and file audited FS. However, this audit requirement may vary depending on the details of the offshore scheme for the UAE’s corporate tax.
9. Are individuals subject to CT?
Based on what we know so far about the UAE corporate tax regulation; individuals are subject to CIT when they are conducting business under a commercial license. That is to say, individuals are not subject to the new regulation on:
- Wages, salaries, and related income, whether received from the private or public sector.
- Capital gains, dividends, and related income earned from holding equity investments on a personal level.
- Real estate investment on a personal level unless a commercial permit or license is necessary to conduct the activity.
- Interest and other income from saving schemes or bank deposits.
10. How can Connect Free Zone assist you with the new UAE Corporate Tax Law?
We are aware that the new UAE’s corporate tax scheme seems complex and overwhelming. Therefore, our legal team is ready to assist you with this comprehensive process; making you take care of it easily.
At Connect FZ, we offer you the best packages, discounts, and prices when you are trying to set up your business in the UAE, whether it is in the Mainland or Free Zone areas.
We work hard side-by-side with your company to ensure you are free to focus only on what really matters. In addition, we liaise with the government authorities regarding the extensive paperwork and documentation. We have more than 21 years of working with organizations across all industries in all 7 emirates.
With, us you will establish only in the best Free Zone or Mainland locations. Ensuring you receive all the benefits each jurisdiction will offer you. We compare free zones’ regulations, locations, advantages, and services.
Would you like Connect Free zone to assist you with the UAE Corporate Tax Law? If you want to start receiving the best counseling and advice, or if you have additional inquiries; you can always call us at +971 43 316 688. Or you can contact us via firstname.lastname@example.org.